The Impact of Interest Rates on Home Affordability
The total cost of a Frederick home is really determined by two factors: the price of the home and the cost of financing, assuming the buyer is not paying in cash, which is about 90% of the time these days. The effect of interest rates on home affordability is larger than any other factor.
While many homesellers are chiefly concerned about the price of their home, home buyers should pay special attention to interest rates. As interest rates go up, the cost of borrowing goes up, and borrowing power goes down.
Interest Rates and Home Affordability
The interest rate plays a big role in determining your monthly mortgage payment. But how big a role? This chart shows how the payment is impacted as interest rates go up:
| 7.00 | $1,198 | 1,231 | 1,264 | 1,297 | 1,331 |
| 6.75 | 1,167 | 1,200 | 1,232 | 1,265 | 1,297 |
| 6.50 | 1,138 | 1,169 | 1,201 | 1,233 | 1,264 |
| 6.25 | 1,108 | 1,139 | 1,170 | 1,201 | 1,231 |
| 6.00 | 1,079 | 1,109 | 1,139 | 1,169 | 1,199 |
| 5.75 | 1,050 | 1,080 | 1,109 | 1,138 | 1,167 |
| 5.50 | 1,022 | 1,050 | 1,079 | 1,107 | 1,136 |
| 5.25 | 994 | 1,022 | 1,049 | 1,077 | 1,104 |
| 5.00 | 966 | 993 | 1,020 | 1,049 | 1,074 |
| 4.75 | 939 | 965 | 991 | 1,017 | 1,043 |
| 4.50 | 912 | 937 | 963 | 988 | 1,013 |
| 4.00 | 859 | 883 | 907 | 931 | 955 |
| 3.50 | 808 | 831 | 853 | 875 | 898 |
| $180,000 -10% | 185,000 -7.5% | 190,000 -5% | 195,000 -2.5% | 200,000 |
You can see that as rates go up, the monthly payment goes up. If the interest rate goes up 1/2 %, you can afford roughly 2 1/2% less in the home value. (These are general numbers, calculated on a mortgage calculator.)
You may have delayed your home purchase decision because of concern over where PRICES may be heading. OR, you may be trying to save for a higher downpayment. Many would-be home buyers are under the mistaken notion that they need to have 20% of the purchase price saved in order to buy a home today. This is a false notion, as there are many loan products available today that require much less than that amount.
FHA loans currently require a downpayment of 3.5%. There are also many conventional loan products that require 10%, 5%, and even as low as 3% down, with contributions from family allowed. And lastly, VA loans are truly no money down loans available to Veterans.
To make the best financial decision for you and your family, also take into consideration where the overall COST of the purchase may be heading. The chart really makes clear the correlation between interest rates and home affordability.
Interest Rates are Headed…
After several years of historically low interest rates, the Fed raised the benchmark federal funds interest rate this week (December 14, 2016). Even with Wednesday’s 0.25 percent hike, interest rates remain at near-record lows. Many mortgage experts are projecting that rates will continue to rise, but not rapidly. As they go up, affordability goes down.
As the economy strengthens, rates tend to go up…although today’s markets are increasingly global. Many things effect rates, not just or own economy. It’s never easy to predict today. Check out Bankrate for rate trends, calculators and general information.
Contact us for our list of preferred lenders to see how much you qualify for today.
The Highland Group
eXp Realty
Frederick, Md 21701
301-401-5119
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